Home-a-loan

With real estate prices on a steady rise, home loans are the only resource left for buyers. However, repayment of the loan through Equated Monthly Installments (EMIs) has its own set of rules. According to Saurabh Mittal, investment expert and advisor, there are several aspects about EMIs that one should keep in mind while signing up for a home loan. These include the percentage of family income that can constitute the EMI, the ideal form of interest rate and what happens when one defaults on an EMI.

Prospective home buyers consider their options at an exhibition about real estate and housing finance. Pic/Sameer Markande

What are the points one should keep in mind when choosing a suitable EMI option? There are not many options available while choosing a home loan. Apart from personal assessment of repayment capacity, the following two options are really beneficial: >> Try and take a loan where the loan account can be linked to a savings account. This facilitates you to save the interest on the amount of balance kept in your savings bank account. Hence, you pay interest not on the balance outstanding but on the difference between the outstanding amount and the bank balance. >> The other option is to get a fixed rate of interest. This may not be advisable currently as the bank interest rates are high. But if the difference between the fixed and floating rate is not much, then one should opt for a fixed rate.

When buying a resale apartment, check all the documents before finalising the loan. File pic for representation

When choosing an EMI option, ideally, how much per cent of the family income should the installment be? If we include all the loans put together, ideally the EMI should not be more than 30 per cent of the net monthly income. In India, certain banks may give loans to people in a higher income bracket where EMIs can be as high as 40 per cent of the net monthly income. But the ideal situation is to restrict it to 30 per cent.

People line up to get the form to apply for MHADA housing at Parel. File pic for representation

When it comes to financial health, is it better to pay a small amount each month for a longer duration or a huge amount for a shorter duration? Financially, it makes sense to repay your loan as soon as possible. There may be cases where one enjoys lower interest rates and tax benefits, and it might be worthwhile to consider various other options. But generally, it makes sense to prepay your loan partly or fully if you have liquidity. Also, a similar choice would arise when there is a considerable increase in the interest rate. Banks may ask you to either increase the EMI or increase the tenure. It definitely makes sense to increase the EMI if one can afford it, as increasing the tenure would result in heavy interest outflow. Refer to the table: Hence, as the above example proves, if one does not increase his EMI by Rs 3,000, he ends up repaying a home loan for almost nine more years and the total interest outflow increases by a whopping R 38 lakh (almost the loan amount).

Does it make a difference if the loan is taken from a nationalised or private bank, when it comes to defaulting EMIs or are the rules the same for both? It does not make a difference whether you take a loan from a private bank or a nationalised bank as all banks follow the rules laid in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. It is just that nationalised banks are not as aggressive as private banks and may be lenient in their approach. It really depends on who you are dealing with.

If one defaults on one month’s installment and the bank refuses to give extra time, whom can one go to for redressal? Banks will never take any stern action if one misses or delays a month’s installment. They can term a loan as a Non-Performing Asset (NPA) only if three consecutive EMIs are missed. Since it is a very cumbersome process to attach one’s property and auction it, generally, banks would want to give reasonable consideration before taking such action. If one still wants to file a complaint against a bank’s behaviour, the same can be done at the Consumer Court and Banking Ombudsman.

What are the rules on payment of interest on defaulting EMIs? If one defaults on EMI, interest is continued to be charged on the outstanding loan account. If bank incurs any extra cost for recovery such as auction fees or legal fees, the same is to be borne by the defaulter.

If we sell the house and prepay the loan, will that incur extra charges? No. There are no charges on prepayment of loan by selling of properties. But as mentioned above, if the property is sold in an auction, all the related charges will be borne by the defaulter.

How can I check that the property I am purchasing in a resale is free of all loan obligations? Checking all the following basic documents – in original – will ascertain that the property is safe to buy: >> Original title property papers to ensure that seller is authorised to sell the property. It is advisable to get an expert to check it. >> Encumbrance certificate to ensure that property is free from legal dispute. >> Release certificate to ensure that property is not engaged in any type of mortgage. And, if loan has been taken from any bank, then the loan has been repaid. >> A No Objection Certificate (NOC) issued by the society.

If a young couple (where both are earning) want to take a home loan, how should one plan the EMI? Should they plan it on one salary or take into account both their salaries? Ideally, it makes sense to buy property jointly in both their names and share the EMI burden. The best way to manage this is to open a joint account from which the EMI would be paid and contribute equally to that account. This is ideal because high property prices have increased the loan burden. When both pay the EMI, both can enjoy tax benefits. If the couple is serious about the career of the wife and they don't intend to have any long sabbaticals, then the combined income can be considered.

There are instances in which a professional may have bought a home and is banking on paying the EMI through his salary but he loses his job. Can the bank consider this, till he gets another one? Does the bank give time? Bank can consider this and would assess the future repayment capacity. They would continue to charge interest for this period. There are various insurance options where temporary loss of job due to illness or accident are covered and may come handy at this point.

Anything else that one must know? The bank has the right to take over your house if EMI is defaulted for more than six months. But at the same time attaching a property is the last thing they want to do. A bank usually lets one mortgage payment default slip by, for the second they mail you a reminder. If payment is not made after the third default, they may send a demand notice. After the end of three months of default, the bank can term this loan as NPA and start the process of recovery. In case of no response to any mails, the bank may send a legal notice through its legal department. The bank gives the borrower a two-month notice period to repay the dues and finally, five months after the first default, the bank may send a notice that the property will be auctioned on a particular date.

Steps to be taken if you miss paying the EMIs: >> Call your lender and find out the options available to you. This is most important, as the majority of people tend to avoid making the call, which worsens the situation. >> If the default is due to a hike in the interest rates, ask the bank to reschedule the loan – increase the tenure to keep the EMI at the same level or reduce it. >> Ask the bank to restructure your loan payment by taking into consideration the future income. >> Make a file that includes all your monthly mortgage payments. This will convince the bank that you are a good customer who has been forced to default due to circumstances beyond your control. >> In dire circumstances, you may have to redeem your savings and retirement plans to pay the EMI. >> If the situation is bad even after six months, a better idea may be to sell the property. Inform the bank about it and use the proceeds from the sale to prepay the loan. If possible, try to continue the EMI even if you are planning to sell the property. By managing to do that, there will be no negative impact on your CIBIL credit score.

Saurabh Mittal is an investment advisor with Circle Wealth Advisors. Readers can contact him at saurabh@cwa.co.in